Profiting from external knowledge : how firms use different knowledge acquisition strategies to improve their innovation performance

In recent years, innovation has become essential for the competitive advantage of firms in a growing number of industries. Due to the fast development of technologies, changing customer demands, shortening of product life cycles, increased global competition and changing regulations, modern firms constantly have to look for new ways to prosper in this very dynamic business environment. To survive in this dynamic environment, firms increasingly look for ways to profit from knowledge in other organizations, like supply chain partners, universities and research institutes, and even competitors. Firms may choose from several strategies for external knowledge acquisition, such as inter-organizational cooperation, venture capital investments, outsourcing of Research and Development (R&D), licensing-in, but also Mergers and Acquisitions (M&As).

When firms try to acquire external knowledge they will face major management challenges. Several empirical studies have indicated that acquiring external knowledge can be time consuming, expensive and laborious. Moreover, establishing relationships with external organizations raises several complex issues, such as appropriation concerns, motivational problems, leakage of sensitive information, and partner dependency. In this respect, the management of innovating firms should not only strategically consider which knowledge acquisition strategy is to be preferred when they want to profit from knowledge developed elsewhere, but they should also consider carefully how to manage their external knowledge acquisition processes. The main objective of this book is therefore as follows:

To analyze how firms can profit from external knowledge using different knowledge acquisition strategies.

In order to realize this objective, four empirical studies are carried out. The first two studies are primarily concerned with the relevance of different strategies for acquiring external knowledge (such as licensing-in, outsourcing and cooperation), using a quantitative approach. Both studies use data of industrial firms from Dutch Community Innovation Surveys (CIS, 1994-2004), which explore the innovation process inside firms. The first study (Chapter 2) concentrates on the occurrence of different external knowledge acquisition strategies over time. The second study (Chapter 3) complements the first study by analyzing whether the different knowledge acquisition strategies are effective in improving the innovation performance.

Next, the other two studies apply a qualitative approach and concentrate on specific management challenges of two different knowledge acquisition strategies, namely inter-organizational cooperation and M&As. The first qualitative study (Chapter 4) provides in-depth information on innovation brokers orchestrating innovation networks of Small and Medium sized Enterprises (SMEs) in the agri-food sector, in different European countries. The second qualitative study (Chapter 5) provides in-depth information on the integration processes of the R&D function, following large, (medium) high-tech M&As in life science industries. In this study we link technological relatedness to specific R&D integration mechanisms, and subsequently to innovation synergy realization.

In the innovation management literature there is a growing attention for the open innovation model, introduced by Chesbrough in 2003. This model emphasizes that the innovation process should be flexible and may cross organizational boundaries, so that it enables the transfer of knowledge and capabilities from and to other independent organizations. According to the open innovation model, firms should not only consider internal, but also external knowledge, capabilities and paths to markets. Yet, despite the recent emphasis on open innovation by innovation management scholars, the empirical evidence of its relevance to innovating firms has so far surprisingly been limited. Anecdotal evidence suggests that open innovation can be beneficial for low-tech industries as well. An important question is therefore whether the concepts of open innovation also apply to lower-tech industries. In addition, whereas the relevance of open innovation is shown for a number of large firms, it remains unclear to what extent open innovation is also relevant for SMEs. The research question in Chapter 2 is therefore:

To what extent do different types (size and technology classes) of innovating firms pursue an open innovation strategy?

The results show that especially since the turn of the century, an increasing share of innovating firms pursue an open innovation strategy, i.e. using external knowledge acquisition strategies, such as cooperation, outsourcing, and licensing-in. In addition, we found an increase in cooperation for different types of cooperation partners, such as suppliers, customers and research institutes. The most prevalent cooperation partners are actors from within the supply chain, i.e. suppliers and customers. Interestingly, the results showed that small firms and low- and medium-tech firms in particular are catching up large and high-tech firms in pursuing open innovation strategies since 2000. Yet, in general, large firms and firms from high-tech industries are still the most inclined to adopt open innovation strategies.

We conclude in Chapter 2 that open innovation has become more common, but is it also more successful? Chapter 3 concentrates on the performance consequences of different knowledge acquisition strategies. In Chapter 3 we addressed the following research question:

What is the impact of different external knowledge acquisition strategies on the short-term and long-term innovation performance of innovative firms?

Drawing from a sample of 686 industrial firms from the Dutch CIS database we analyzed what the impact is of different knowledge acquisition strategies; both open innovation strategies such as licensing-in, outsourcing, cooperation, as closed innovation strategies such as M&As and the contrasting case of in-house innovation, on the short-term and long-term performance of incremental and radical innovation. We found that open innovation is often a successful strategy. More specifically, cooperation was found to have a positive impact on incremental and radical innovation, both in the short and long term. Thus, cooperation is not only increasingly practiced (see Chapter 2), it also turns out to be a successful strategy to profit from external knowledge. Furthermore, we found that outsourcing has a positive impact on a firm’s short-term and long-term performance of innovations, whereas licensing-in only contributes to short-term innovation performance. That licensing-in only contributes to the short-term innovation performance suggests that licensing-in is especially useful for acquiring knowledge and technologies that are relatively rapidly applicable for creating innovations. This knowledge is often also be available to other organizations, so that licensing-in does not lead to long-term competitive advantage. The results suggest as well that there may be several sub-modes of outsourcing and inter-organizational cooperation that facilitate innovation in different ways.

Contrary to our expectations, we found that the acquisition of a relatively large firm boosts the innovation performance significantly, although only after a substantial number of years. Apparently, it takes considerable time and effort to integrate the acquired firm in such a way that it improves the innovation performance. Finally, exclusive in-house innovation turned out to be a sub-optimal strategy, as we found that exclusive in-house innovation had a consistently significant negative impact on the performance of both short and long-term performance of incremental and radical innovation.

Chapter 4 presents a study on the innovation networks in which SMEs cooperate. Although cooperation can have a positive impact on innovation performance (see Chapter 3), for SMEs it can be a major challenge to cope with all the issues stemming from inter-organizational cooperation, such as cultural differences (e.g. between academics/researchers and entrepreneurs), appropriation concerns, motivational problems, and leakage of sensitive knowledge. In the innovation management literature there is a growing attention to intermediary organizations, such as innovation brokers, which assist SMEs with the challenges that come with innovating in a network. In Chapter 3, we therefore asked the following research question:

How do innovation brokers orchestrate SME innovation networks in the agri-food sector?

Drawing from the rich experience of four innovation brokers in the agri-food sector in The Netherlands, Germany and France, we substantiated the network orchestration processes that are important for innovation processes of SMEs. First, innovation brokers assist SMEs in the early stage of the innovation project, to develop ideas independently of large institutional actors, and to find complementary partners such as other SMEs, or research institutes. In contrast to an individual SME, an innovation broker can typically draw from a large and diverse network, in order to compose a network of complementary actors. Second, innovation brokers take the lead in setting up appropriate coordination mechanisms to facilitate the inter-organizational cooperation within the new innovation network. Third, innovation brokers often are involved in the network during the whole innovation trajectory, in order to manage the inter-organizational cooperation between the different parties. Especially in the case of conflict between the parties, innovation brokers are of added value in SME innovation networks. Being in a neutral position in an innovation network in which all other parties have a commercial stake, and having ample experience with inter-organizational innovation processes, enables innovation brokers to do so.

As stated in Chapter 3, we found that major acquisitions have a positive impact on the long-term performance of innovations. In Chapter 5 we analyze how major M&As can contribute to innovation performance. The research question in Chapter 5 is:

What is the role of technological relatedness in realizing innovation synergies in M&As?

Our study of 10 large, medium- and high-tech M&As in life-science industries showed that there are three categories of innovation synergies: innovation cost synergy, innovation process synergy, and new growth platforms. Furthermore, we concluded that depending on the level of technological relatedness between the involved firms, different integration mechanisms are applied. The results suggest that there are three levels of R&D integration, starting with a minimal form integration, which is the standardization of system, such as the harmonization of information, reporting, and control systems. Systems standardizing is applied in the case of lowly technological related M&As and does not or hardly lead to innovation synergies. The second level of R&D integration focuses, in addition to system standardization, on structural linking, e.g. in terms of integrated R&D management, R&D teams, or even R&D departments. This level of integration is primarily applied in moderately technological related M&As and may lead to innovation process synergy and new growth platforms. The third and most far-reaching level of R&D integration focuses, in addition to system standardization and structural linking on process re-design, i.e. rationalization processes (eliminating duplicate R&D), specialization, and re-prioritizing of innovation projects. Process re-design is mainly applied in highly technologically related M&As, and is associated with each of the three types of innovation synergy.

On the issue of organizing the Post M&A Integration process, we conclude that there are several factors that enhance innovation synergy realization, such experience, integration planning, and open communication. For instance, we found that firms with a track record of similar acquisitions, draw explicitly from their experience by using dedicated PMAI tools and guidelines. These firms are likely to integrate the R&D functions more quickly than firms without relevant experience.

To conclude, we found that external knowledge becomes increasingly important for the innovation activities of firms. Although it can be difficult to profit from the knowledge and capabilities from other organizations, more and more firms manage to do so. This research has shown that companies use different knowledge acquisition strategies and this research has arrived at concrete possibilities and guidelines to improve this process.

Finally, this research has made a number of main contributions to literature.
- First, we advanced the external validity of the open innovation model. Several studies have pointed at the importance of the open innovation model, but previous studies mainly concentrated on a small amount of case studies, or on one sector only. Our longitudinal research shows that firms from different industries and size classes increasingly pursue an open innovation strategy. In addition, our research shows that open innovation strategies contribute to innovation performance. The impact of licensing-in and outsourcing on innovation performance in particular has so far hardly been investigated. The extension on knowledge acquisition strategies and industries brings research on open innovation to a higher level.
- Second, we presented new empirical evidence on the socially relevant academic discussion on whether M&As have a positive impact on the innovation performance of firms. With our large scale quantitative study we showed that major acquisitions have a positive impact on the long-term performance of incremental and radical innovations. Contrary to previous studies, which focused on the number of patents as indicator for innovation performance, we used an indicator for innovation performance that also captures the commercial impact of innovations. In addition, we not only included high-tech, but also lower-tech firms.
- Third, we developed a conceptual model for innovation synergy realization in M&As. Although several studies investigated the R&D integration process in M&As, so far it has remained unclear if, and if so how, innovation synergies are realized in large M&As. In our research we combined insights from the strategic management and the post M&A integration literature to gain a better understanding of the process of innovation synergy realization. The model shows that depending on the technological relatedness between the involved firms, specific R&D integration mechanisms should be applied and that depending on these R&D integration mechanisms, different innovation synergies can be realized.
- Fourth, we substantiated the network orchestration processes of innovation brokers active in SME innovation networks. Previous studies in the innovation management literature focused primarily on identifying and describing the functions and roles of innovation brokers in the (regional) innovation system. Our research shows specifically which contributions innovation brokers make at the innovation network level, and how they make these contributions.